Question

a. Give three characteristics of a perfectly competitive market. [3 marks]

b. List and explain three types of barriers to entry that may be used in a monopoly. [3 marks]

c. For a monopolist, why is marginal revenue less than price for every level of output except the first? [4 marks]

d. Give the conditions which should exist for price discrimination? [3 marks]

e. Draw a diagram to show the long run equilibrium condition of the perfectly competitive firm [4 marks]   

Answer 1

A.

There are following characteristics

There are free entry and exit

They produce homogeneous product

There are many buyers and sellers

They are price taker i.e. They have to charge what market price is.

B.

1. Patent and copyright

2. Economies of scale

3.monopoly resources

Explanation :

1. Patent and copyright.

This is useful to create monopoly as no one can sell the product which has copyright or patent. It creates monopoly. If any one sells this good which are copyright, they have to pay to firm and it becomes illegal for them.

2. Economies of scale is when we increase the production, ATC will decrease. Generally with increase production, ATC is increases. So if we are good enough to keep economies of scale, we can keep berries on entry. Because its vary hard to do that kind of business.

3. Monopoly resources.

This kind of resources generally do not have with every one. If you are living in the area, which makes for example coffee beans but no one has that kid of quality in the world you have some monopoly.

C.

Because monopolist are price maker, they have control over the price. The monopolist demand curve is downward sloping so, price will decrease as output increases, So when we sell one extra unit, marginal revenue will be less than price as lower price contribute lower to total revenue.

D.

1.Market must be imperfect competition that means they are not be perfect competition. Because imperfect competition are price maker. They have control over the price.

2. There must be a prevention of re sale for the product. If one can easily buy the product cheap and sell it with higher price to another. There is no price discrimination possible.

3.you should have idea of different market segment identification. That is, for every market has different elasticities so, you should have idea that which market has what elasticity.

For example in USA, some author of book has die hard fan, but not in india. So we can charge higher price from USA for that author book than India.